By David F. Heathfield
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E. e. a point on the isoquant) such as to maximise profits. We shall analyse these two aspects in the context of a simple two-factor model. 2 The Isocost Line Let us assume that the prices of our two inputs, v 1 and PI and P2 respectively. 1) 28 Cost Functions and the Theory of the Firm 29 An isocost line is a line representing all combinations of VI and V 2 which can be purchased for a particular sum of money, at a constant (ISO) tot al cost , TC = TC. 3) and the intersections with the axes are TC / P I and TC / P 2 .
However, most of the production functions used in empirical analyses are homothetic functions. The definition of a homothetic production function can be explained in terms of its isoquants. All such functions (and no other class of functions) have isoquants that are radial projection s of each other. 3. 3, the isoquant for q = q is only a 'blown up' version of the isoquant q = ij . The slope of the isoquants are preserved along every ray through the origin, that is the isoquant slope at A equals the slope at B.
It must, however , be remembered that the point where average costs start to increase may be at a very large output level, perhaps many times larger than the largest existing firm. 7 intersects the AC curve from below and at the minimum of AC. This is always the case. 6 The Total Cost Curve TC q located beneath the AC curve if the latter is falling and above the AC curve when the latter is rising . 7. Mathematically we have: TC = AC x q MC = dTC = AC+ dAC q dq dq Therefore dAC ciqq = MC-AC Hence the slope of AC is positive when MC > AC and negative when MC < AC.
An Introduction to Cost and Production Functions by David F. Heathfield